Cool. Yeah, why don't we kick off the next Fireside Chat? Very excited to host our next group, which is Lear, leading supplier of seating and electronics, as most of you probably know. Really has stood out, I think, over the last year for their ability to cut costs. Pretty impressive job last year, taking a significant margin from performance. And today we're here with Jason Cardew, the CFO, Lear's VP of Finance, Jared Fedele. Maybe to kick it off, why don't we just start with, you know, any opening remarks on, you know, how things are going in particular with Q2?
Yeah, thanks, Callum, for hosting us today. Second quarter has really sorta continued the positive momentum that we had built in the first quarter. Strong, strong operating performance, particularly in the things that we can control. We've made a lot of progress on restructuring efforts on automation. We continue to have strong performance from our wire business in Mexico, which, you know, struggled last year. That's the efficiency improvements that we saw in the first quarter and towards the second half of last year, sorta continued into the second quarter. A lot of positive momentum around operating performance and net performance, as you alluded to. In terms of the financial results that we expect in the second quarter, you know, we did withdraw guidance for the full year on our first quarter earnings call.
We are seeing another solid quarter in the second quarter. We expect revenues of $5.9 billion in the quarter, operating income of $260 million-$270 million. Operating margin is sort of in the mid-4%. Free cash flow of $50 million-$100 million. Strong enough performance that we're now ready to restart our share repurchases, and we're looking to do that. You know, coming out of this discussion today, probably target around $25 million of repurchases in the quarter, so similar to what we did in the first quarter. We're also seeing a very strong new business pipeline. Our quote activities remain at a high level, so we're very confident in our ability to continue to win business and grow.
Our tariff negotiations, which I know we'll talk about more in a few minutes, have gone very well. We don't expect any leakage, really, in the second quarter. Everything's on track and progressing in a positive manner right now.
You said that you would reinstate guidance in Q2 earnings?
Yeah, we fully expect to be able to reinstate guidance on the second quarter earnings call. Now, something could change between now and then, but our current plan is to do that. We do see, you know, we have pretty good visibility into the second half of the year. Our initial guidance had anticipated lower production year over year in the second half. As we look at the second half, there have been some, you know, modest changes in our customers' plans, but really not outside of what we had anticipated previously at this point.
Your schedules at this point haven't materially changed from last year?
Yeah, there's been a handful of disruptions in the second quarter, but nothing significant.
There is still a lot of uncertainty. How should we think about incrementals and decrementals? And then I think you even mentioned, on the last quarter call, you know, concern, potential, you know, trim issues, mixed issues.
Yeah.
Are you, is that playing out, or how should we think about that?
Yeah, I'll start with the last part of that question first. You know, we did identify one change. It was particularly around the take rate for rear-seat entertainment systems and one vehicle line where that part was imported at a very high tariff rate, and there was a reduction in the take rate. It's really been isolated to that. We were closely monitoring customer schedules, but we haven't seen any signs of, you know, mixed erosion beyond that. I would take that as a positive or encouraging sign. In terms of the incremental and decremental margin expectations, given the volatility in the production environment, I think it is important to sorta level set that for investors so they can, you know, build their models on what to expect from Lear for this year and beyond.
In seating, our variable margins range from 15-20%. It's consistent with what we've said in the past. We do have programs below that and above that. The key driver or determining factor there is the level of vertical integration. If you have a just-in-time seating program without any componentry, you may have a variable margin that's more like 10-15%. If you have a program that is just-in-time seating plus seat covers plus leather plus foam plus structures, you certainly could be, you know, in that 20-30% range. It just really depends on the level of vertical integration on the program and seating, and on average that seems to work out to the 15-20%. Again, though, it also depends on the region.
North America and Asia tend to have higher margins in our seat business. Europe tends to be a little bit lower than the average, and South America is generally in line with the average. In E-Systems, you know, the range is typically 20%-25%. The biggest factor there is both vertical integration and the region where we see the production. Our European wire margins or margins in E-Systems are a little bit higher than North America. If volumes are down in that market, it would tend to have a bigger impact than, say, North America or Asia. That is kind of it in a nutshell.
Got it. Can you remind us your tariff exposure? I think you said you were 94% USMCA compliant. Also, how should we think about Honduras as potentially, I guess, challenged now? At one point we thought it was good news.
Yeah.
So.
Yeah, so, and I appreciate the question, Callum. So from a, a gross tariff exposure for 2025, we're looking at about a, a $200 million impact. That's without recovery. And it's, we kinda look at that in two different ways. Half of that, $100 million, is from our business in Honduras that's getting hit with the auto-sectorial 232 tariffs at 25%. Now, in Q1, when we first spoke about this, we had customer agreements for about 90% recoverability of that. Where we stand today, we're almost at 100%. So the team's done a phenomenal job working with the customer, getting agreements in place to offset that risk, which is fantastic. The remaining 100%, again, in Q1, we kinda split it out as to 50/50, meaning 50% of that remaining $100 million was with directed suppliers.
They had customer agreements, direct pass-through, no risk to Lear Corporation. Where we stand today, it's about 60/40 now with some of the changes that have happened with the reciprocal tariffs and everything. It's 60% directed that has customer recoverability pass-through, and about 40% that we're left dealing with working with our customers with negotiations and agreement. And, quite frankly, I mean, we owe it to our customers to mitigate as much as humanly possible from a tariff standpoint, but our position hasn't changed. We're still going after 100% recoverability, on anything tariff-related, and the team's doing a fantastic job getting there. Then to your earlier point on, you know, where we're at with USMCA, you know, we still have that focus, that laser focus on making sure everything we have is USMCA certified in Mexico and Canada.
We are over 90%, which is great. From this time kind of last year, we were only at 77% in 2024. Over the last year, the team's made great strides getting that up into this kind of over 90% rate, which is fantastic.
Do you have anything else that you know about, like, Mexico, Honduras are obviously the biggest. Anything, like, anywhere else in the world? Like, China in particular, tiny amount, depending on where the tariffs land. They seem to be a little less now, bigger, historically. Could be a big impact. Do you have anything that was in that initial 200 that was from China? 'Cause then had an outsize.
Yeah, so the regional breakdown of kinda where we sit, you are correct. I mean, we import from Mexico, Canada, Honduras. We have Europe and Africa, and very little from China. I mean, we've got about, if you go kinda down the list, from Mexico, about $2.8 billion of imports into the U.S. from Mexico. That depends, fluctuates a little bit based on volume. Seating is around $2 billion of that. E-Systems is around $800 million of that. Again, flexes with volume. Majority of it is trim, seat covers, structures, thermal comfort, components. On the E-Systems side, it's really wire harnesses. Canada, about $100 million of imports into the U.S. Honduras, about $620 million recoverability with almost 100% right now. Europe and Africa is about $100 million-$150 million of imports.
The majority of the stuff we get from Europe is directed from our customers. And China is really not monetary, really. It is nothing in the grand scheme of things for us. Not too much, which is good.
You know, I think you're expecting full recoveries. Any long-term risk of having to resource? I guess the news this morning, we were talking right before this about GM, maybe is actually good news for you. How should we be thinking about the long-term implications here? 'Cause maybe your footprint is an advantage to win some business, and there might be some cost of having to shift business.
Yeah, and, I guess a few ways we look at it from a long-term standpoint. How we're set up, we're pretty fortunate that, you know, we're in North America for North America. We're in Europe for Europe and Asia for Asia. That helps to a certain extent. Any moves or anything we wanna be doing from a production standpoint, we also make sure we're in lockstep with our customers and make sure that we have agreements in place for wherever we move. They understand and they know they're supportive of that. Like anything else we do, any business we're looking at, we wanna make sure returns, cost and excess of its cost of capital. And then if we have excess capacity anywhere, we'll look at that. To your earlier point, I mean, we did flag in Q1 some indirect impacts as well too.
When you look at the revenue in North America for 2024 that we had for vehicles made in Mexico and Canada that came into the U.S., we had about $1.8 billion of revenue sitting in North America. Europe was around 13% of sales, so around $1 billion sitting there. Revenue, the majority of that is with JLR. We see with the deal that was made with the U.K., JLR has returned shipments. That is positive for us. In Asia, there is about $350 million of sales that we have, primarily from South Korea with GM and Hyundai, quite frankly. It is something we gotta keep our ears on. To your point with the recent announcement that was just made, I do not know if you can add to that, Jason.
Yeah, I think we're seeing some initial signs that there is likely to be more U.S. production. GM's announcement yesterday suggests that. You know, we have a great relationship, great partnership with General Motors. We're their largest seat supplier. They're our largest customer for the company overall. We view the announcement as generally positive from yesterday or late yesterday. My understanding is there will be additional production on some key platforms that we're on today. We're looking forward to supporting that move to add capacity and maybe reallocate some production from plants in Mexico to the U.S. We think it's a step in the right direction and a positive, generally, for Lear.
We think there's going to be more of that, more production in the U.S. that results from the tariff and trade policies of this administration over time. We are fully prepared to put additional just-in-time seat capacity in place to support our customers.
The positive mix you're referring to is the SUVs?
Yeah, my understanding is there's additional full-size SUV production. That's a key program for Lear. We look forward to supporting GM as they add production capacity on that platform.
Now, on the Honduras impact, when do you actually have to take action there? I guess there's a lot of uncertainty. With the labor, it is massively lower than Mexico, actually, from Honduras. It was kind of surprising.
Right.
Some, I guess some tariff premium is still okay, I imagine.
Yeah, I think, you know, at a 10% rate, what we've said previously, and this still holds true, is that it's about a break-even with Mexico. We believe that ultimately that 25% tariff rate is going to come down, either to zero and Central America gets folded into USMCA ideally, or even, you know, just to a diminished rate, say, of 10%, in which case our footprint and many of our competitors, on the wire side, you know, Yazaki, Sumitomo, DRÄXLMAIER , all have capacity for wire production in Central America. I think we're looking to our customers too, to get a sense of what they want us to do. At this point, they're not asking us to make any changes to that footprint.
We can avoid some of the tariff costs by redirecting the programs that we produce in Honduras to support vehicle production in Mexico instead of the U.S. to avoid the tariffs. We are taking some of those actions in collaboration with our customers. Ultimately, I think the goal of the administration is to have competitive vehicle manufacturing in the U.S. In order for vehicles produced in the U.S. to be competitive on the world stage, they need access to the lowest cost labor for the labor-intensive products that go into the vehicle. Wire harnesses being a perfect example of that. I think ultimately, when the USMCA is renegotiated and as these trade negotiations continue, that's where we're most likely to end up would be our view.
In terms of capital allocation, you mentioned at the beginning that you will start buybacks again from the pause. How do you think about buybacks and M&A broadly? I mean, do you still see more tuck-in deals? Do you think, I think earlier in the year you talked about wiring needing consolidation. Do you think there's opportunities in that area?
Yeah. So first, generally, our capital allocation priorities remain the same. We're gonna invest in the business through CapEx, to support both business segments, the competitive position that we have in those segments, you know, through CapEx. And to the extent we have excess cash available, we are going to continue returning that to shareholders, through share repurchases. You know, we had initially targeted, I think, $250 million of repurchases this year. We'll have to revisit that once we have an updated outlook for the full year. We are gonna, as we talked earlier, start buying back stock again here in the second quarter. We really like the tuck-in acquisitions that we've done on the process, innovation side, these manufacturing integrators that we've bought that support both our seating and, most recently, our E-Systems business with the StoneShield acquisition.
If there are more of those that we can do, those have had a great financial return for us. They continue to differentiate us on a cost basis and a quality basis in our manufacturing plant. We will look to do more of that. I do think that consolidation in the auto supply space is necessary. It's a question of, you know, when and which components. You know, we talk generally about complete seats and wire, but I think also you have to look at seat components. We're the most vertically integrated seat maker. If there's an opportunity to get further scale in certain seat components, I think there may be some consolidation that happens there. I certainly think consolidation in the wire space is possible down the road. The management team and our board are laser-focused on improving shareholder returns.
If we see something that creates value, and involves consolidation in either business, as a consolidator or having a portion of our business consolidated with someone else, we're open to anything and everything in that regard.
What type of seating components are you thinking about? 'Cause there's been some issues with others doing, like, structures and frames.
Yeah, I think that seat structures is probably not the, the best example. That is, that is the most challenging kinda subset of the seating business. And we have a, a smaller structures business than some of our competitors. But think about cut-and-sew, trim covers, maybe leather. There are other components in seating that have more attractive return profiles that could be interesting if, if they become available too.
Maybe how is the competitive landscape for seating looking today? And particularly any update on the comfort and thermal seating tech that you acquired and how that's trending? That was supposed to be a margin and growth driver. Is that on track from your, I think, investigation two years ago? Is that your talk focused on that?
Yeah, thermal comfort remains an important part of the growth story for, for seatings. Maybe start with that part of the question. You know, we have 21 production awards, about $135 million of incremental revenue per year that's, that's come out of those new awards in Comfort Flex, Comfort Max, and FlexAir. We have 39 active development projects ongoing. We've had a total of more than 80 development contracts that have either started and led to a production award or are still in process with 30 different customers. A tremendous amount of interest in the innovations that we're bringing to seating. I think, in terms of our competitive position in seating, you know, we are the industry leader there. That's something that's resulted from a multi-decade commitment to organic and inorganic investment.
I think we've invested more consistently than our competitors in that space over a very long period of time. We have a deep bench of industry experts. We have all kinds of folks that were on the team that are in important roles in other competitors now, but we have a fantastic team in place. That is an important point of differentiation. What that team's done from an execution standpoint, on both the product acquisitions and the process acquisitions, is a key point of differentiation. We talked about that a little bit on our fourth quarter earnings call.
You know, we believe we have a 2-5% cost advantage versus the competitors through a combination of the process innovation leading to lower manufacturing costs in our chip plants, in our leather plants, and then also on the product side through our modularity offerings. That is really what will fuel growth and additional market share for us in seating, you know, over the long term. We are very confident that we can continue what we've done over the last five years, which is increase our market share in that business on the back of that superior competitive position that we have built.
Would that 2-5 translate directly to a margin? Do you think you have, like, a pretty massive margin lead and seating margins aren't super high? 5% is quite high for.
Yeah. So, you know, I think that's one of the reasons why our margins are higher. I think it's an important reason why our margins will remain higher. You know, the investments we've made in automation and innovation in our plants are not easy to replicate. You know, we took a lot of capacity off the market by acquiring those companies and having them focus exclusively, exclusively on Lear instead of supporting our competitors. Yeah, I think that we have room for margin expansion in seating. We've talked about 8%-8.5% being the target margin in that business. You know, we guided to 40 basis points of margin improvement through net performance this year. We see that as repeatable in 2026, 2027, 2028.
Maybe not that precise number, but we see margin expansion through net performance, on a reoccurring basis over the next several years there. We see both a margin growth opportunity and a top line growth opportunity more longer term, I'd say, on the revenue side. Certainly, nearer term, we expect to expand margins regardless of the volume environment.
On performance, I mean, it was very strong in Q1. How do we think about it? It sounds like you've seen more coming, but the rest of the year, should we be level in Q1? I think it was at the peak, I think, for the year.
Yeah, I'd say that the first quarter would be our peak net performance improvement. Part of that is an easier comp from the first quarter of last year. We do expect in the second quarter positive net performance again in both business segments, at a lower rate than what we generated in the first quarter. We see that continuing. We see meeting or exceeding the targets we set for the full year, you know, in both business segments. When we update guidance, we expect, you know, that's what you'll see on the net performance line.
The initial guide for performance was.
It was 40 basis points in seating and 80 basis points in e-systems. We expect to meet or exceed that in, in both businesses.
Got it. Outside of tariffs, what, what are the big risks that we should be thinking about for the rest of the year?
I think there's both a risk and an opportunity. You know, our guidance assumed that the production would weaken in the second half of the year and be down year over year more so than the first half of the year. You know, if the, you know, sort of economic strength and resiliency that the U.S. economy has exhibited thus far this year continues into the second half of the year, perhaps there's a little bit of a volume opportunity there. At the same time, you know, there are some difficult trade negotiations that are taking place. Everyone's heard about the restrictions on the export of rare earths out of China, and that has the potential to impact production at some point. This year we've seen very modest impacts so far.
We've reached out to all of our customers, and virtually all of them feel confident that production will not be impacted this year. There are a couple of exceptions to that. If I had one risk on my mind, you know, for the second half of the year from a volume standpoint, that would be it. In terms of additional opportunities, I think just, we're more focused on executing on that pipeline of new business that we're pursuing this year. We had a strong growth quarter in E-Systems. In the first quarter, we have a number of programs that we're targeting in Seating. The only question mark on the growth side is whether those programs get sourced this year or next year.
We have several programs that we're confident we're going to be able to secure and take from our competitors. We're working hard to achieve that, you know, in the second half of this year or into the beginning of next year.
Those are programs for vehicles currently made in the U.S. Is that what you're conquesting?
Yeah.
U.S. production?
It's also vehicles made in China for China and Europe for Europe. Yes, it includes vehicles made in the U.S. for.
Oh, for the U.S. market. I was just sort of getting at is, what about there's, I personally think that at some point, like, the Japanese, Koreans, Europeans may need to localize more in the U.S. Is any of that coming to market yet? Any interest from customers and bids for some of that, that's an opportunity for you guys?
Yeah, there hasn't been a lot of that. We're hearing the same chatter that you're hearing suggesting that there will be more to come. There are no additional real active quotes for that other than we talked about a few minutes ago with General Motors.
You said what was your original outlook for the second half of the year? I mean, what were you thinking at the start?
Yeah, I think we had volumes down, well, for the full year, we had on a Lear-weighted basis production down 2%. I think it was sort of flat down one in the first half and down two to three in the second half of the year, year over year.
I mean, do you think that's still a line where I, that's.
That's pretty close to where S&P is. If you're asking whether there's, you know, where the opportunities lie, you know, that's certainly one area that could turn into an opportunity. I think there's a fairly pessimistic outlook in IHS or S&P in the second half of the year on certain platforms that may or may not materialize. Something that we're looking at closely as we think about how we update our full-year guidance, here in another month or so.
Got it. What about steel, maybe even copper? I mean, steel prices are up. I do not think there is any news yet on copper, but I think there is an investigation there. Who knows what happens there? What is your current pass-through protection that you have on those, 'cause I feel like it might be tougher to get, like, material recoveries after all the tariff recoveries.
Yeah, you know, with the inflation in materials that we saw, you know, going back four or five years ago coming out of COVID, we worked to continue to increase the pass-through and indexing mechanisms that we had in place. I think we went from 80% to 85% on steel. Now we're up to 90%. We are almost entirely insulated from risk on raw, raw steel purchases. Copper has always been sort of in that 90% range, so most of the wire is covered. In some of the connection systems, it's on an indexing agreement, and other components are not, in that case.
Got it. What about FX? A lot of companies are saying FX is turning favorable. Is that something that relative to your initial guide could be good news?
Yeah, I think the weaker dollar generally is going to help us. Yeah, I think, gosh, the initial guidance was what, 1.04, 1.05 for the EUR, and we're at 1.114 now. So that's certainly a tailwind. I think also the CNY is gonna be a bit, a bit of a tailwind. The MXN's kinda gone the other direction, but we're mostly hedged for this year. I think we're 85% locked in. I think we got it to 19.50, and it's floating around 19 right now. So there could be a modest headwind on that, but it's nothing meaningful.
Got it. What about innovation? You did just get a PACE award for your zonal control, which I, to be honest, I was not familiar with. So any awards yet on that? What is the interest there? Yeah, I mean, maybe any color on that opportunity since that's a very growth area and often sort of hard to find these days, growth areas.
Yeah. I think over the last seven or eight years, we've had a renewed focus on product innovation. And that's being recognized both by our customers through new business and through, you know, industry experts like Automotive News that have this annual PACE award process. The most recent award was our seventh PACE or PACE Pilot award that we've received over the last seven years. It's become an important part, I think, of the Lear story that may be a little bit underappreciated. With the zonal controller, there's a production contract with a European luxury OEM that goes into production the second half of this year on multiple models. That is a growth opportunity for us in electronics. That's one of the areas that we continue to invest in, in electronics.
We have also won a PACE award for a Battery Disconnect Unit that we had initially launched with GM and the battery electric truck. We have had a PACE award on our thermal comfort module as well. We have won a number of programs through that award too.
Anything that's differentiated about the controller that made it win the award versus other tech that's out there? I mean, it's all brand new. It's kinda hard to answer.
Yeah, I think it's really the flexibility, the way the, you know, the way it's scalable and flexible, the way the software is designed for the module. That's what the award was based on. That's what differentiates it.
Got it. What about China and your local mix in China? Where are you today? When do you think you kinda catch up with the growing locals in China?
Yeah. We've continued to make progress there. I think when we issued guidance this year, we talked about 37% of our China revenue being with the Chinese domestic OEMs. Through the first four months of this year, it was 38%. I wouldn't be surprised to see it end up around 40% for this year. We talked about 50% in 2027. I wouldn't be surprised to see that pull ahead a little bit as well based on current volume performance on key platforms and just the ongoing new business awards that we've received in China. We're trending in the right direction. We're not walking away from some of our traditional customers there. If you think about even 20% or 30% of a 29 million unit market, that's a really attractive opportunity.
There are great opportunities even with our traditional customers there. Good businesses. They may have lost share on certain platforms, but there's others that continue to do quite well. In terms of the Chinese domestics that we're performing well with, you know, BYD, Xpeng, Xiaomi, Leapmotor, we've had a lot of success with those customers. With Xiaomi, the SU7 was, you know, an absolute positive surprise for us. The level of volume that that program achieved far exceeded what we had initially planned for. We continue to build and cultivate our relationship with BYD. There is also a baffle on the level of growth we may experience with some of the newer automakers in China. We're not going to chase every program, every customer that's available to us. We're going to be selective.
Everything that we quote and win has to earn a return in excess of our cost capital. We've seen a number of great opportunities that have allowed us to achieve those goals and continue to grow our business there.
In addition to pausing guidance, you also normally provide a three-year backlog. You decided to sort of delay that till late in the year.
Yeah.
I think that was before tariffs really took off here. When do you think we could get the three-year backlog? Is that potentially delayed even further? 'Cause I imagine automakers aren't really ready to make a lot of product decisions yet either.
Yeah, we've seen continued uncertainty. I think we'll update a three-year backlog when we feel like we have a high degree of confidence in that third year because the customer's production plans have settled down a bit. I think you're gonna see more extensions on programs that were ICE programs that were previously going to build out. That's a factor. We did see a gap in the sourcing of new programs as customers tried to sort out what to do with their powertrain strategies that will weigh on the 2027 backlog. We talked about that on the fourth quarter earnings call. Nothing's really changed with that time period. The great success we had in the first quarter in e-systems, on the new wire awards and other awards, largely benefit 2028 and 2029.
You will not really see an impact in 2027 from that. 2027 continues to look like a bit of a light year from a revenue growth standpoint, but we are encouraged by the progress we are seeing on 2028, 2029, and 2030 with all the programs that are in the quote pipeline right now.
Why is 2027 looking like a lighter year? Just really the lack of sourcing activity last year, which would have fueled new business growth in 2027. 2024 was a year where we saw a number of programs canceled, delayed, where the sourcing was delayed outside of 2024, pushed into 2025. Some of that is even kind of dragging from early in 2025 to later in 2025. It is the lack of new program activity with our customers generally, that would launch in the 2027 timeframe, that is weighing on that number. This is not a Lear-specific issue.
I view it as an industry issue.
Everybody creates this sort of gap, which I guess is still occurring because I don't know how automakers make any decisions right now. Maybe on that front, I mean, 'cause not only do they not know where to build capacity, you don't know what kind of powertrain 'cause we don't know the regulations. What are you seeing and what is your view on the EV side? 'Cause that was a big growth driver for e-systems and seems to probably be taking longer now than you originally expected.
Yeah, I think that's fair. I think that the adoption curve is definitely flattened out here in the U.S. and that it will take longer. I still see it as a meaningful part of the market over the next, you know, five to ten years. We do not see that kind of hockey stick of growth that maybe was anticipated by most, you know, if you just go back in a year or two years ago and look at what the industry prognosticators were predicting. In Europe, we still see pretty good demand and growth in EVs. I think that market will be, you know, it again, it may not meet the original adoption curves, but we will see continued growth there. Certainly in China, you know, it's been a strong growth story there.
We see that continuing. We do see, generally speaking, again, more ICE extensions, more work on ICE vehicles, new ICE platforms. That mix between ICE and EV is shifting a little bit back towards ICE. I think that is generally positive for us. Programs that are extended where we have achieved all the, you know, efficiency improvements in the production process, that is a good thing for us from an operating margin standpoint. We are certainly not fearful of that taking place.
Great. I think we're out of time. So, yeah, we'll just wrap it up there.
Thank you very much.
Okay.